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Monday, 21 December 2015

The Zero-Sum Claim

Product packaging prompts passion.  Lookalike love oscillates. My post on lookalike products prompted debate, and a British Brands Group (BBG), response.   In the interests of encouraging a healthy debate, the concept of the zero-sum game in relation to my arguments merits exploration. Let's start with the rather timely subject of pie -- namely market share as pie.

Love, ideally not zero-sum
The classic economics approach to brands is that branding is a zero-sum game where brands compete to gain market share.  In this scenario, one brand's gain is exactly offset by another brand's loss. If this is true, then lookalikes quite clearly benefit to the detriment of brands. But what if it isn't a zero-sum game? My argument is that brands and lookalikes not operate in a zero-sum game, (for simplicity, "brands" means mainstream brands in the remainder of the post.)

Fundamentals of zero-sum games

The story begins, as is often the case, with pie. In a zero-sum game, a player's loss results in another player's gain, and vice-versa.  If I have a bigger slice of the pie, you must have a smaller slice.  If you eat all of the pie, I get none. The size of the pie does not change.  Most recreational games, like poker and tennis, are zero-sum.  For one player to win, another must lose.
Pumpkin pie by Evan-Amos

Games are not zero-sum when wins do not correspond exactly to loses.  The size of the pie changes. This includes anything that is mutually beneficially, mutually destructive, has no impact on one player, or the benefit/loss to one is not equal to the loss/benefit of another.   For example, parties are mutually beneficial for attendees and hosts (if yours aren’t, consult Pippa Middleton.) War may look zero-sum (one side wins, the other loses), but war itself diminishes the size of the prize.

Economics makes no moral judgments as to what constitutes fair; zero-sum games are frameworks for analysing how the pie is distributed.

Branding and market share

Economists have often construed branding as a zero-sum appropriation of market share. The battle of the brands means that one brand's gain through branding corresponds to another's loss. If Apple wins, Microsoft loses. However, emerging economic interpretation suggests branding increases markets.  Readers noted that shower gels haven't always existed.  This Kat remembers the good old days when all you had was a bar of soap (and licked road clean before breakfast).  The function of soap and shower gel is largely the same, but branding and marketing created a market for shower gels.
Clean cat

Bottled water, cigarettes, sports drinks, cough syrup, and superfoods are all, in this Kat’s view, markets largely created through branding and marketing (don’t tell a coconut-oil devotee that, or they’ll have your unanointed skin.) Historically, new personal care products for women have skilfully used branding and marketing to establish their markets.  Apple is credited with skilful use of branding. Branding plays an important function in creating and growing new markets, whether it be marketing (shower gel) or innovation (Apple) driven.

To sum up, if branding grows the pie, then branding isn’t zero-sum.  Therefore, lookalikes and brands do not operate in a zero-sum game. There are other considerations, but this post covers only zero-sum.

What does this mean for lookalikes?

If branding does not function as a zero-sum game in market share, then the gains to one brand are not exactly offset by the losses to another.  It cannot therefore be assumed that lookalikes gain market share at the loss to brands. This does not preclude the possibility that a lookalike may capture market share held by brands. However, this discussion highlights that lookalikes and brands are not necessarily in an I-win-you-lose, zero-sum game.

So there we have it, the shower-gel pie (eww.)  And now I open it to readers, what do you think?

N.B. Readers noted I previously played a bit fast and loose with the term, "private labels." To clarify, non-private-label lookalikes, and non-lookalike private labels exist. Lookalikes are often private labels, but private labels are not always lookalikes.


Dave said...

So what about new product development?

Brand A decides it wants to launch a new biscuit. Spends ages coming up with a great new style of biscuit. Spend lots of money convincing people to try new biscuit (e.g. drawing on its brand, which people trust enough to be willing to try). Starts to sell them in volume after significant investment in time and money.

Only to find that, as soon as it is popular enough, the biscuit is knocked-off by a copycat version, similar enough to benefit from all the marketing and effort, but not similar enough to infringe any hard IP. The firm making the knock-off does not need to take a risk on new product development - it just waits to see what gets traction, then copies that.

Fair? It does not seem so to me (biscuits chosen as example because hungry).

Anonymous said...

Is not shower gel just another form of soap? I find it hard to believe that previous consumers of soap now use both soap and shower gel, or previously there were consumers who used no soap, but now use shower gel exclusively? I think soap and shower gel are just two slices in the same "soap" pie, no? Hence, the soap/shower gel market split was driven by technology (liquidising soap) not branding or marketing. Or have I missed the point?

Anonymous said...


"Fair" is a coin that has two sides. The company referred to above which develops the new branded biscuit does not have a monopoly on branded biscuits.

All that this company will have is some IP to defend its commercial product in the market. That IP protection is going to have some limits. Some of boundaries around these limits will be clear-cut, some will be a little fuzzier. But there are always going to be boundaries. Free competition, albeit aggressive commercial competition, will occur around these boundaries.

This is fair.

There are no prizes for developing and bringing to market a new product. If it happens to be a commercial success, well done. If it does not, then tough luck sunshine, whether you invested huge sums in product development or not.

Anonymous said...

If you want another example of branding "increasing the pie", then look no further than the Nurofen story in Australia.

("An Australian court has ordered Reckitt Benckiser to remove several of its Nurofen pain relief products, saying the British firm had misled customers by marketing identical products for different types of pain.")

Who's losing now?

The Pigs said...

All is not as black and white - there is the tragedy of the commons as well as the tragedy of the anti-commons.

Nicola said...

Many thanks, Dave, The Pigs and Anonymous(es) - you raise important points. Lookalike products, the reduced cost of reverse engineering, submarkets (shower gel and soap being submarkets of a products-to-make-humans-clean market) and the various tragedies of the commons are all germane.

And Anonymous 12:46 - what a perfect example of marketing/branding used to grow markets.

Dawn said...

Brand owners don't suggest that brands exist in a zero sum game or that that is the basis of harm from lookalikes. That is the Katonomist’s proposition.

The gains made by the lookalike may come not only from sales lost by the brand leader but also from sales lost by secondary and tertiary brands. This is because the lookalike distorts shoppers’ decision-making by implying that the sought-after attributes of the copied brand can be purchased for the same money as other cheaper products that compete primarily on price. The introduction of a copy of a brand may take the shelf place of a popular secondary brand and eventually lead to its delisting.

The Katonomist confirms that “emerging economic interpretation suggests branding increases markets”. The examples she gives (shower gels, sports drinks, etc) are all new innovations entering the market but lookalikes by definition cannot be new innovations since they merely copy existing brands. How then can lookalikes grow the market?

The Katonomist claims that “Economics makes no moral judgement as to what constitutes fair” but economics does recognise the need for fair competition. If competitors are operating on an uneven playing field where some incur all the costs of product development, packaging design, marketing etc while others free-ride on their efforts, this must eventually discourage investment and innovation and damage fair competition.

In sport, we recognise that if some competitors take unfair advantage (for example by taking performance-enhancing drugs), this discourages other competitors and damages the sport. Shouldn’t we take a similar view of businesses that take unfair advantage?

Meldrew said...

The point of innovation is that it results in innovative products and/or innovative processes.
Of course not all innovation is successful, and for success a product/service has to sell on a combination of one or more of price/quality/reputation.

If the new products/services sell on being at a lower price than products/services that are already on the market, then the extent of effect on the existing market depends upon relative quality/reputation, but this does not necessarily mean the pie diminishes, as some will persist in buying higher priced goods/services on the basis of their quality/reputation.

If the new products/services sell on being of a higher quality than products/services that are already on the market, then the extent of effect on the existing market depends upon relative pricing/reputation, but this does not necessarily mean the pie diminishes, as some will persist in buying lower quality goods/services for their price/reputation.

Innovations that sell on reputation are even more interesting. With a sufficient reputation products/services can be sold that are neither lower in price, nor higher in quality than competitor products and what is being bought is an experience (which does not necessarily equate with snobbery/stupidity since for reputational goods other snobs/thickos will be impressed by someone using such over-priced goods/services and the user can hope that this will reflect on and improve the users’ pathetic reputation). The extent of effect on the existing market will be small, but positive, since a proportion of the public will persist in buying lower reputation goods/services for their price/quality. Most of those who effusively gush about brands aspire to having reputational products/services - who wouldn't want to be a supplier of Veblen goods - the con man's apotheosis.

The pie diminishes if an innovation is so radical that it can simultaneously provide lower price and higher quality while demolishing the reputation of all competitor products (rare) or if there is less money available (common).

In short, innovation normally increases the size of the pie. Copying generally just smears the pie around but it can increase the pie if the innovator has significantly over-priced the innovation. The overall size of the pie depends on the health of the economy.

In all cases, if copying is possible, the market will soon even out by competitors adopting the innovators innovations (usually after giving the innovator time to show the merit of the innovation). So protection of innovation (by patents and designs) and of reputation (by trademarks) is important if an innovator wants to get as much of the pie as possible.

And it is important that innovators get some reward for increasing the size of the pie.

Mmmmm, pie!

Polyanna said...

Competition is a Good Thing (Economics 101). Unfairness is by definition a Bad Thing ('deloyal', like payments off the books by FIFA - if any, I prudently add). But what is to be considered Unfair is more difficult. Are we to balance the economic Good against the Unfairness? - generally, or in particular cases? And what is the Pie (market value, or volume or total consumer satisfaction)? Selling similar goods at lower prices is likely to increase total turnover, and possibly total market value as well.

There is a right (and maybe sometimes even a duty?) to copy what is useful and unprotected (per Laddie J.). This is Progress. Innovators are useful to Society - so are copiers (within limits - but what limits?).

THE US anon said...


Progress is NOT the copy, but rather, the having more to copy from.

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